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Over three-fourths of surveyed firms agree with the statement that “Contracts, land, and other economic resources mostly fall in the hands of enterprises that have strong connections to local authorities.”

Vietnam Firms Complain about Competing in Unlevel Playing Field
According to World Bank, Vietnam’s relative weak overall productivity and significant differences in firms’ performance reflect a combination of internal and external factors. The higher productivity of FDI firms can, for example, be attributed to their use of new technologies and their better management capacities. 
Most SOEs often have public service obligations and are therefore not able to maximize returns. In addition, overlapping responsibilities in the management of SOEs and weak corporate governance can undermine efficient use of resources in the state-owned sector. Domestic private firms are generally of limited size, preventing economies of scale and explaining why many of them are undercapitalized and rarely invest in new technologies.
Firms are also sensitive to the quality of the external environment. While Vietnam has improved its ranking in the World Bank’s Doing Business report (from 90th in 2010 to 70th in 2020), it is still lagging in some sub-indicators such as taxes, cross-border procedures, and disclosure. The 2016
Enterprise Survey also revealed that severe obstacles remain, including access to credit, corruption, connectivity, and taxes. In line with the differentiated performance by categories of enterprises, not all firms are equal with regard to the external environment, as small domestic firms are most likely to face more serious obstacles than large FDI firms and SOEs that have the human and financial resources to overcome these barriers.
Because the responses are not trivial, the background paper focuses on a selected set of obstacles that are viewed as playing a key role in Vietnam. It argues that firms are penalized by an uneven playing field, corrupt practices, limited access to credit, and weak incentives to innovate. This selection was based on the results of the above-mentioned indicators and recent analytical work. The absence of skill development and infrastructure was justified as these two topics are covered in other background papers.
Many firms complain that they operate on an uneven playing field. Data from the Provincial Competitiveness Index suggest, for example, that only 30 percent of enterprises consider legal decisions and decrees to be transparent. Over three-fourths of surveyed firms agree with the statement that “Contracts, land, and other economic resources mostly fall in the hands of enterprises that have strong connections to local authorities.” 
A cross-province regression during 2013–16 indicated that firms’ performance is strongly correlated to land rights security, transparency of legal documents, and perception of biased treatment by the province or provincial courts. In other words, the quality of the overall contractual environment, including formal procedures and the ways they are applied, appear to be key determinants of firms’ performance.
Firms also point to corruption in public administration as an area of concern. According to the 2016 Enterprise Survey, nine out of 10 business expected to give gifts to public officials to get things done, while only 52 percent of firms had the same expectation in the East Asia and Pacific region. 
More recent data show that the incidence of corruption has declined in recent years, but its level remains exceptionally high. The Provincial Competitiveness Index shows that 59 percent of firms continued to pay bribes in 2017.
Access to finance remains the most severe constraint, especially for small private enterprises in Vietnam. According to the 2016 Enterprise Survey, only 29 percent of the smallest enterprises (those with 1 to 20 employees) have an active line of credit compared to 57 percent of large firms (those with more than 100 employees). 
Paradoxically, financing constraints emerge in an environment of high credit growth and ample liquidity but, as in many other developing countries, the credit market is highly segmented. On the one hand, access to external financing is relatively easy for large operators (including SOEs) and for those who can provide collateral (such as real estate developers). On the other hand, it is almost impossible for operators with no history or collateral to obtain a line of credit. 
About 90 percent of banking credit requires collateral with an estimated value 2.5 times higher than the line of credit. As a result, credit growth to the SME sector has been anemic at around 3 percent annually, or four to five times slower than the average expansion of total credit to the economy. Consequently, SME investment is subdued and is largely internally financed.
Finally, there is some evidence that suggests Vietnam’s innovation capacity remains constrained. Investment in research and development (R&D) remains low with Vietnam, with spending at about 0.4 percent of GDP, compared to Australia (2.2 percent), Singapore (2.2 percent), China (2.1 percent), and Malaysia (1.3 percent). 
Perhaps more importantly, these investments remain highly dependent on the public sector (56 percent), compared to China (22 percent) and Singapore(37 percent), which rely primarily on the private sector. Equally, while growth in patent applications has  been increasing (from 196 to 560 over a decade), granted patents28 in Vietnam are one of the lowest compared with the number of applications.

DIEP NGUYEN